The 2023 U.S. Regional Bank Failures

How Silicon Valley Bank collapsed in March 2023 after rising interest rates hit its bond holdings, and why its failure spread fear so fast.

In March 2023, Silicon Valley Bank, the sixteenth-largest bank in the United States, collapsed within days. It was the largest U.S. bank failure since 2008, and it was followed by the failures of Signature Bank and, in May, First Republic Bank.

How SVB got into trouble

SVB served many technology start-ups and venture capital firms. During 2020 and 2021, deposits poured in as tech companies raised huge sums. SVB invested much of this money in long-term government bonds and mortgage-backed securities, which were safe from default but sensitive to interest rates.

When the Federal Reserve raised interest rates sharply from 2022 to fight inflation, the market value of these bonds fell. This is interest rate risk: when rates rise, existing bonds paying lower rates lose value. SVB faced large unrealised losses.

The run

At the same time, start-ups were burning cash and withdrawing deposits. On 8 March 2023, SVB announced it had sold bonds at a loss and planned to raise new capital. Worried depositors, many connected through the same venture capital networks and social media, rushed to withdraw. On 9 March, customers tried to pull out around 42 billion dollars in a single day. On 10 March, regulators closed the bank.

A key vulnerability was that the vast majority of SVB’s deposits were uninsured, above the 250,000 dollar deposit insurance limit, so depositors had strong reasons to run.

The response

To prevent panic spreading, U.S. authorities guaranteed all deposits at SVB and Signature Bank, including uninsured ones, and the Federal Reserve created a new lending facility letting banks borrow against their bonds at face value. First Republic was later sold to JPMorgan Chase. In Switzerland, the troubled bank Credit Suisse was taken over by UBS in a government-brokered deal the same month.

The speed of a digital run

In past bank runs, depositors queued at branches. In 2023, they could withdraw money with a few taps on their phones, often after reading warnings in group chats. SVB lost a quarter of its deposits in a day. Regulators noted that digital banking and social media made runs far faster than before.

Lessons

The episode highlighted interest rate risk, the danger of concentrated and uninsured deposits, weaknesses in supervision of mid-sized banks, and how quickly confidence can vanish in the digital age.

Thinking safe bonds cannot cause bank failures

SVB's bonds were unlikely to default, but their market value fell as interest rates rose. When the bank needed cash quickly, selling them meant realising losses. Safe from default is not the same as safe from price changes.

Key takeaways

Silicon Valley Bank collapsed in March 2023, the largest U.S. bank failure since 2008.
Rising interest rates cut the value of its long-term bonds.
Mostly uninsured deposits and fast digital withdrawals fuelled a rapid run.
Authorities guaranteed deposits and created a lending facility to stop contagion.